Summary

Summary

1. Balance of Payments

   • A record of the value of all the transactions between the residents of one country and the rest of the world in a period of time
   • Any transaction that leads to money entering from abroad is called credit item and has a positive value
     • Example: foraing tourist visiting the country
   • Any transaction that leads to money leaving the country is called debit item and has a negative value
     • Example: people spending money on other countries

2. Current Account

   • Balance of trade in goods, the formula is is the export of goods - the import
   • Balance of trade in services, the formula is all expotrs of services - the imports
   • Income, wages, interest, rent and profit(wirp), formula WIRP received - WIRP paid
   • Current transfers, recipt of money given without any good or service in exchange, formula tranfers received - transfers paid
     • an example is donations
   • If the result is positive, it means that there is more money flowing into the country and viceversa
   • current acount = capital acount + financial acount +errors and omissions

3. Capital and financial accounts

   • Financial
     • Direct investment
       • Inflows and out flows of long term investment in physical capital
       • Example: land
     • Reserve assets
       • Official reserves held by goverment for direct financing of international payments imbalances and to affect its exchange rates
     • Portfolio investment
       • Buying and selling of stocks, shares, goverment bonds, pension funds
   • capital
     • Capital transfers
       • Net monetary movements of capital goods in the production process
       • Example: investment grants or debt forgiveness
     • Transaction in non-produced, non-financial assets and intangible assets
       • Exchange of money in non-produced assets like natural resources
       • Example: minerals, patents

4. Current account and Exchange rate

   • a deficit in the curret acount of the balance of payments may result in downward pressure on the exhange rate of the currency and viceversa
     • the supply of the currency is increasing in the foreing markets but the demand is weaker
     • Foreing demand is increasing but the supply of the currency is weaker